Deficit spending means more spending

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Michael Strain writes,

But the costs of financing government spending should always be front and center. When they aren’t, cost-benefit tests simply become benefit tests.

Without the norm of a balanced budget, the political cost of government spending drops to zero. So we get more and more of it. That is why tax cuts do not lead to less government spending. In the absence of a balanced-budget norm, lower taxes make more spending seem all the better.

6 thoughts on “Deficit spending means more spending”

  1. “A new working paper released by the nonpartisan Congressional Budget Office studied the longer-term effects of financing a large and permanent expansion of government spending through higher taxes. Using a progressive income tax, a $1 trillion increase in spending reduces the level of GDP by 5% and after-tax wages by 10%, after 10 years. A $2 trillion spending boost reduces wages by 20% and GDP by 10%. CBO’s analysis does not include the economic benefits of the spending, but isolating the effects of the higher tax burden needed to finance it is illuminating.”

    Another thing that needs shouted from every rooftop.

  2. –“Deficits are not always bad. They can be used to finance investments that enhance productivity, reducing their costs, or that make society better off. In 2020, the U.S. borrowed 15% of GDP, which was appropriate given the pandemic. As with many economists, my views on the dangers of deficits have softened in recent years.”–

    I think this gives away too much.

    First, does anyone believe deficits are used for high return investments to reduce costs? It’s not as if we have a separate capital budget in which debt is taken on for specific projects in which analysts actually have some idea of an IRR. My sense is that they finance mostly low return investments and transfer payments, as that is largely what the federal government spends its money on.

    Second, a large portion of the economic damage was caused by the decision to lockdown the economy during March-May and encourage people (even young people who faced little risk) to stay at home. While I wouldn’t Monday morning quarterback the decision as we didn’t know as much back then, the economic hit didn’t require deficits of such magnitude. Not only is monetary stimulus much cheaper, but because the 2020 recession was a supply shock, it didn’t call for much stimulus.

    Moreover, stimulus could have easily designed to have been more economically efficient (checks to most of the country, regardless of need, was expensive and largely a waste of money). Some stimulus programs have perversely increased unemployment – I’ve heard plenty of anecdotes about people refusing to work due to high unemployment insurance payments.

  3. Two simple (at least relatively so, in this day and age) steps to bring the “cost” part of “cost-benefit test” back into focus:

    (1) eliminate all payroll withholding and all estimated tax payments;
    (2) move Election Day to April 16.

  4. Hello Arnold,

    As the government has no funds or rather resources of its own, every dime spent is deficit financed. A government can never escape a deficit regardless of whether funds are taxed or borrowed. Your thinking is obsolete.

  5. A Balanced Budget would be utterly and completely useless unless and until you actually make the government obey GAAP.

    Without GAAP, all that will happen with a balanced budget is the same thing that NY State — which has had a BBA for literally decades — pulled in the early 90s…
    They sold Attica Prison to the State of NY bonding agency…

    Hell, half the chicanery they do in the first place is more dependent on the failure to use GAAP than on budgetary issues. If anyone except the government tried to pull the crap they pull — routinely — the entire accounting department would be in jail so fast their heads with get torn off by the sudden acceleration.

    https://www.nytimes.com/2008/08/09/opinion/09granof.html

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